Benefits of Principled Tax Policy: EU VAT Reform Results

“New own resources should fulfil the criteria of simplicity, transparency, predictability, and fairness.”

One would think that the above recommendation came from a Tax Foundation report on principled EU own resources policy. While we would like to claim credit, the recommendation, rather, comes from the EU’s own 2016 Monti report and more recently, the EU’s 2020 Institutional Agreement on new own resources.

When policy is designed on these sound principles, governments can raise sufficient revenue, support the economy, and chart a path toward a successful tax system. The recent EU VAT reform on e-commerce is an example of this win for governments, consumers, and companies.

In July 2021, the EU agreed to eliminate a VAT exemption for goods imported into the EU valued at less than €22 by non-EU companies. In other words, by eliminating a carveout and broadening the tax base, customers will now pay the same tax regardless of the value of the good or if the e-seller is from the EU.

The EU estimated that the exemption was being abused by importers who artificially set the price of their goods below the exemption limit and cost EU treasuries nearly €7 billion a year. This, by definition, placed a heavier tax burden on taxpayers importing more expensive or larger volumes of goods and hurt government budgets.

When authorities were able to identify this fraud, EU customers would receive a call from customs asking for the additional VAT payment after the good arrived at the customer’s home. The additional cost came as a surprise to many consumers.

In addition, non-EU companies were gaining an unfair competitive advantage by avoiding the tax over those EU companies that were not able to benefit from the exemption.

The reform also addressed company compliance concerns. Before July 2021, sellers needed to have a VAT registration in each Member State in which they had a turnover above a certain overall threshold. The threshold varied from country to country.

The reform simplified this requirement by replacing the various thresholds by one common EU threshold of €10,000. Furthermore, online sellers may now register for an electronic portal called the “One Stop Shop” where they can take care of all their VAT obligations for their sales across the EU.

For importers, a similar mechanism was implemented called the “Import One Stop Shop” to register for VAT in the EU and ensure the correct amount of VAT is paid to the correct Member State.

Six months later, how has the reform worked? Is the VAT system for e-commerce more simple, transparent, predictable, and fair?

According to preliminary results, the answer is yes.

Member States collected around €1.9 billion in VAT revenues from July to December 2021. This would translate to €3.8 billion annually. The figure includes €690 million in extra revenues for parcels valued at less than €22.

However, available data so far relate to only one facet of the new rules—those related to imported online shopping parcels valued at less than €150. Further data on other parts of the reform, such as new rules applied to online sales within the EU and new obligations for online shopping platforms that store goods in warehouses in the EU, should become available in the coming weeks.

Over 8,000 traders have registered to the “Import One-Stop Shop.” Overall, EU customs handled around 500 million items covered by the new simplified dataset with 94 percent of them supplied by IOSS registered traders. 

Under the old system, governments were losing revenue, consumers did not have price transparency, and companies were not competing on a level playing field. The VAT e-commerce reform is a success story for principled policy by focusing on simplicity, transparency, predictability, and fairness.

Unfortunately, in December 2021, the Council took two steps back in terms of principle-based reforms. The Council agreed to broaden the list of goods and services to which reduced VAT rates can be applied. In other words, more carveouts can be implemented despite the marginal benefits to consumers and more complex tax rules. The approach also cuts against the usefulness of the VAT as a source of revenue.

As the EU considers further reforms to the VAT and other new own resources, policymakers should continue to rely on these guiding principles, rather than using tax fairness as a code word for income inequality or corporate profitability. Clear, transparent rules make it easier to see whether the tax system is working fairly. Member States and the EU can work together to simultaneously raise revenue and support the economy.

Sophie Tremblay

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